Wednesday, 20 March 2013

CYPRUS: ''Rescue Postponed'': The one-time levy: rejected by the Parliament

Parliament in Cyprus voted on Tuesday night to reject a new law that would have applied a mandatory one-time levy to holders of bank accounts in the country. The levy, which was intended to raise around €5.8 billion ($7.5 billion) billion, had been a precondition for the crisis-ridden country to receive a bailout from the European Union. It would have been levied against not only Russian oligarchs and wealthy Britons, but also normal, middle-class savers.

But on Tuesday, not a single member of the Cypriot parliament voted in favor of the legislation. Some 36 members rejected the measure, with 19 abstaining. The vote led protesters outside the parliament to cheer. One member of parliament with the country's Green Party had warned of a "new, foreign rule on the horizon." The parliamentarian conceded that the country's massively bloated financial sector had to be shrunk, "but not with a gun at its chest" and "not on the basis of plans that would destroy Cyprus' economy and turn us into slaves."

It remained unclear whether the "no" vote would cause the bailout package to collapse. Cypriot media outlets reported that President Nikos Anastasiades planned to meet with leading politicians in the country in order to discuss the path forward.

Under the deal reached in Brussels over the weekend on the long disputed bailout for Cyprus, all those who have deposited money in Cypriot banks would have been forced to pay a one-time levy -- regardless whether they are Cypriots, Greeks, Britons, Russians or other nationals, and regardless whether they have €1,000 in their account or €10 million. It would even include pensioners who had put their savings in a Cypriot bank, a move many believe violates the core principles of Europe's cradle-to-grave social welfare system.

The plans also envisioned the richest customers at Cypriot banks paying a significantly higher contribution, a provision that was expected to hit Russian oligarchs who have parked their money -- or, laundered it, as critics allege -- in Cyprus.

Up until now, all the bailouts of euro-zone countries have been partially financed by taxpayer money. Governments put up cash to save the crisis-ridden countries, making them vulnerable to risks or losses. In the case of Greece's second loan program in 2011, private investors were called on to take part for the first time.

Contrarily to Greece's bailout, Cyprus' bailout deal also had a moral component: Cyprus has long been viewed as a tax haven for the wealthy elite from Russia and elsewhere in Europe, and policymakers felt they should be made to pay for the bailout as well. Furthermore, the argument goes, Cyprus's banks would also be threatened if no bailout were approved, putting savers' money in danger anyway.

Even worse would have been the so-called contagion effect on other crisis states. In recent years, countries like Greece, Portugal, Spain and Italy have already struggled to prevent depositors from moving their money overseas. This was reflected in the high level of imbalances in Europe's so-called Target2 settlement system, in which euro-zone central banks and the European Central Banks transfer money across the common currency union. The situation had calmed down since last fall, when ECB President Mario Draghi promised to help the highly indebted countries with unlimited bond purchases in the event of a financial emergency. Confidence in banks slowly returned, but this recovery process has now been suddenly disturbed.